Big YHOO investor: MSFT will need to boost offer

The portfolio manager for Yahoo’s second-largest shareholder says he believes Microsoft “will need to enhance its offer if it wants to complete a deal” to acquire Yahoo. The comment was made by Bill Miller of Legg Mason Capital Management in his quarterly letter to shareholders of the Legg Mason Value Trust fund, which owns 80 million Yahoo shares.

On January 31, Microsoft (MSFT) made an unsolicited offer to acquire Yahoo (YHOO) at a price that represented over a 60% premium to where YHOO’s shares were trading. LMCM is YHOO’s second-largest shareholder, owning over 80 million shares. Subsequent to the deal being announced, we have met with Steve Ballmer, MSFT’s CEO, and spoken with Jerry Yang, CEO of YHOO.

YHOO’s Board has pledged to give the offer careful consideration and to do what they believe will deliver the most long-term value to YHOO owners. That is the right message, and we are waiting to hear their views as they develop. That said, we think it will be hard for YHOO to come up with alternatives that deliver more value than MSFT will ultimately be willing to pay.

We think this deal is a strategic imperative for MSFT, and that YHOO is in a tough spot if it wishes to remain independent. It has been reported that MSFT has been discussing a combination with YHOO for well over a year, and that it had been prepared to pay over $40 per share previously. We have no way of knowing whether those reports are accurate or not.

Our own valuation work puts the value of YHOO in the range of those reported numbers, though, and we think MSFT will need to enhance its offer if it wants to complete a deal. YHOO shares were recently trading at a four-year low, and the stock averaged above the current offer price for all of 2004.

YHOO is a uniquely valuable asset, and we expect MSFT will do what it takes to acquire it.

Separately, Bloomberg News reported yesterday that T. Rowe Price, the 12th-biggest institutional holder of Yahoo shares, favors the Microsoft acquisition and would be “very vocal” if Microsoft raises its bid and Yahoo still rejects it. Those comments were made by a T. Rowe Price fund manager to the news service.

After Yahoo turned down Microsoft’s bid yesterday, a T. Rowe Price spokesman was less definitive: “We are reviewing Yahoo’s response to the initial bid from Microsoft and considering at this point what’s in the best interest of our shareholders,” said spokesman Brian Lewbart, when I asked if T. Rowe Price was taking an official stance.